by  Stephen Smith & Neal Watkins

If you are thinking of buying or already own French property via a French civil property-holding company (‘SCI’) now is the time to consider or review the effect of French law and tax. Don’t leave things too late. Otherwise, your French property ownership can cause unnecessary problems and expenses.

Joe and Jane Public live with their two children in the UK where they are resident for tax purposes. French succession law problems may arise if they are or become the direct owners of French property. Their English advisers (Hey Diddle Diddle) therefore recommend that the French property is bought in or transferred into the name of an SCI, and its shares issued to the Publics. This is because French succession law does not apply to shares in an SCI held by UK domiciled members. The Publics can therefore own French property indirectly, which they and their family can occupy free of rent. They can also freely dispose of their French property under their English Wills, free of all the constraints and problems of French law.

The SCI is a type of company not known in English law. It is an entity separate in law from its shareholders so that it can own property in its own name. It’s shareholders do not have limited liability, but instead remain liable for its debts in the proportion to which they own shares. It is managed by one or more gérants who may be shareholders. It requires very little administration. Its regulations are contained in its statuts which set out the main objects of the SCI, its capital structure and its siège social (registered office). Normal expenditure such as insurance premiums, taxe d’habitation and taxe foncière can all be paid by direct debit from a bank account in the name of the SCI.

For succession law purposes, so far so good. But as explained below, for internal French tax purposes, not necessarily so. Those resident in the UK for tax purposes that use an SCI can also inadvertently fall into a UK tax pit. The provisions of the 1963 and the 1968 Double Tax Conventions (‘the 1963 Treaty’ and ‘the 1968 Treaty’) between France and the UK also play an important part.

Hey Diddle Diddle also fail to warn the Publics that non-compliance with the basic French accounting and declaration requirements, members’ meetings and management (it is important that this is demonstrably on French soil) can lead to the SCI being treated as non-existent for French succession law and other purposes. The Publics may feel that the very small amount of formal administration which an SCI requires can well be carried out by them alone. For reasons explained below, it is important that they overcome this temptation and accept that a fee paid to a non-shareholder gérant is a small price to pay for peace of mind.

English tax problem and solution

French internal tax law and Article 4(g) of the 1968 Treaty usually treat an SCI as a “fiscally semi-transparent partnership”. This means that, although the French property belongs to the SCI, for tax purposes it belongs to the shareholders. Article 15-11 of the French Tax Code does not tax shareholders for the rent-free use by them and their family of property belonging to an SCI.

However, the UK Revenue may still treat the SCI as a company for UK tax purposes. If they do, the Publics may become liable to personal income tax in the UK in respect of the value of their free occupation of the French property, which is known as a “deemed benefit in kind” (sections 145 and 146 of the Income and Corporation Taxes Act 1988 [“ICTA”]).

In a nutshell, section 832 ICTA defines a company as “any body corporate or unincorporated association but does not include a partnership”. The UK Revenue will generally consider an SCI to be a company for UK tax purposes, because: (a) it has an existence in law separate from those who own shares in it; and (b) it has a share capital; and (c) its activities are carried out by the SCI exclusively, and not jointly with the shareholders; and (d) any profits arising are not available to the shareholders as they arise, but only following a decision of the SCI or its members; and (e) the shareholders are responsible for the SCI’s debts; and (f) the SCI owns the French property, not its members.

But do the Publics enjoy a benefit in kind under UK tax law? The answer depends on whether they are “Directors” as defined in section 168(8) ICTA. In brief, the Publics will be treated as directors if the affairs of the SCI are managed by one or more members of the SCI, a single director or board of directors or similar body. Section 168 also include as a director “any person in accordance with whose directions or instructions the directors of the company are accustomed to act.”

In the past it has been thought that a charge under these provisions could be avoided by arranging for the running of an SCI to be undertaken by a professional resident in France, or by offshore trustees. However, more recently the law in this area has been tested in a case that went before the House of Lords. This case greatly affects the type of property ownership as it suggests that owners using structures as suggested might be deemed to be “Shadow Directors” of the SCI, thereby deemed to be officers of the company and subsequently being within the UK tax net on the benefit that they receive from using the property.

To avoid a charge under UK benefit in kind legislation, it might be possible to arrange the SCI’s affairs in a particular fashion. This might be achieved by the way in which the statutes are drafted. For example, the statutes of the SCI should provide that no shareholder may at any time be a gérant. Secondly, the statutes should clearly state that the gérants’s powers are wholly unlimited and can be exercised without the shareholders’ consent, provided that these are in the best interests of the SCI. For example, important matters such as works to the property itself should be dealt with by the gérant whose choice of persons to carry out such works should be entirely at his discretion. Thirdly, the statutes should not expressly state the circumstances in which the gérant can be removed or resign. Finally, the SCI should not only be managed exclusively by the non-shareholding gérant, but also be seen to be so managed. For example, apart from the use of a bank account in the name of the SCI which cannot be operated by the shareholders but into which, of course, they can pay at the request of the gérant the cash which is required to keep the SCI running, simple Minutes of all shareholders’ meetings should be kept indicating that all acts of management were in the hands of the gérant who should also keep such appropriate records. Consultation by the gérant with the shareholders must be the seeking of wishes and not of directions or instructions. Most crucially, the Minutes and other records should be scrupulously kept and show that the gérant is not “a person in accordance with whose directions or instructions the directors of the company are accustomed to act” (see section 168 ICTA above).

The choice of gérant may not be an easy one but should best be left to those advising the Publics provided they are (as Hey Diddle Diddle are not) experts in both French and English law and practice.

The Publics should disclose the facts (which will be discovered on an eventual sale) in their annual UK tax return. If an SCI already exists the statuts can be suitably amended in accordance with the above recommendations. This is not an over expensive process. A more expensive solution would be to draw up a tenancy agreement for which the Publics pay market rent for their personal use of the French property. As mentioned above, the use of an SCI can provide the answer to many French succession law problems. As explained below, it can also provide solutions to many French tax problems. But it is not known in how many cases the UK Revenue has in the past or may in the future apply the relevant provisions of ICTA to an SCI. All that can be said is that the UK Revenue are well aware of their taxing powers and, although they are not willing to give a blanket ruling, the suggestions made in this article should avoid a benefit in kind assessment in respect of the free occupation by the shareholders of an SCI of its premises.

Income tax, corporation tax and capital gains tax (‘CGT’)

As a semi-fiscally transparent entity, an SCI is not itself subject to French corporation tax treatment, but UK domiciled members instead pay personal income tax (25%) pro rata to their shareholdings in the company. However, if an SCI engages in industrial or commercial activities in France (e.g. letting on a furnished basis), it loses its semi-fiscal transparency and profits may be subject to French corporation tax at 33.33%. To avoid this problem, the SCI should only therefore be seen to engage in ‘civil’ activities (e.g. letting on an unfurnished basis). The objects clause in the statuts should be carefully examined and (in the Publics case) amended to exclude any powers which may be considered to be of a commercial nature.

The Publics can let the French property on a furnished basis if they take a lease of the unfurnished property from the SCI, own the furniture in their private names and then sub-let the property and furniture to holiday tenants. Again, the costs of implementing such a structure are not overly expensive but, as elsewhere, careful advice is required to avoid the French tax authorities applying abus de droit (tax avoidance) legislation, which can result in various penalties.

If the SCI retains its semi-fiscal transparency, the Publics are liable to French CGT at 33.33% of any net gain (50% if the sale is deemed to be profit motivated) calculated on the difference between the sale price and the index-linked acquisition price and certain qualifying acquisition/improvement costs (provided that they have not already been deducted for French rental income tax purposes). If they sell their shares or the underlying property after 2 years of ownership, the net gain is further reduced by 5% each year, so that after 22 years of ownership, no French CGT is payable. However, if the SCI loses its semi-fiscal transparency, it loses the benefit of the 5% annual reduction, and instead suffers annual depreciation of 2% of the acquisition cost (the nominal value of the SCI’s share capital), thereby creating an increased liability to French CGT. This may be catastrophic if the nominal value is not at least equal to the true cost or value of the French property, and the statuts may therefore (as in the Publics case) need to be changed if the value is much lower.

The SCI itself is also vulnerable to being regarded as UK resident for UK corporation tax purposes in respect of both income and gains, unless the Publics move to France permanently (and thereby lose the succession law advantages of this structure), or can demonstrate that they only perform management activities in France. Furthermore, UK income tax and UK capital gains tax could be imputed on UK resident members without double tax relief for any French tax already suffered.

Inheritance tax (‘IHT’) and wealth tax

French wealth tax will only affect the Publics if the net value of the French property is currently worth more than FrF 4.7 million. If so, the annual rate of tax they pay begins at 0.5% and rises to 1.65% if the property is worth more than about FrF 46 million. The net worth of the property can be reduced by borrowing to finance the acquisition, or by financing the SCI by a carefully prepared shareholder’s loan account.

When a UK domiciled member dies, his or her shares in an SCI are usually subject to French IHT. In theory, the shares may also be subject to UK IHT. In practice, however, double taxation is avoided by Article IV of the 1963 Treaty, which provides that shares in an SCI are only subject to French IHT.

However, Hey Diddle Diddle did not advise that, unlike the position where a co-owner dies owning French property directly as an individual en tontine, no French IHT is payable on the death of the first tontinier of shares in an SCI. If the Publics have not already done so, the statuts of the SCI can be altered accordingly. By reason of the method of the imposition of French IHT, it may be that this may result in more French IHT being paid on the death of the surviving tontinier than would have been had it been split between the two deaths (of Joe and Jane, say) but this can be ascertained in advance and will rarely occur. This form of ownership can achieve a considerable tax saving (4.89% transfer duty instead of 60% tax) if the tontiniers are unmarried.

Another way to avoid or mitigate tax is to gift part or all of the bare ownership (nue-propriété) of the shares to your beneficiaries, whilst reserving in your favour a right to use the property (usufruit) and reserve the right to any income in your lifetime (for French IHT purposes, the value of the property is reduced by the value of the usufruit).

3% tax

Hey Diddle Diddle did not advise the Publics that their SCI may be liable to pay an annual tax of 3% on the market value of the French property (calculated as at 1 January each year) unless the necessary French tax return was completed and filed by them on time. Joe Public is annoyed and seeks proper advice elsewhere. Luckily, with timely assistance, he may be able to rectify the problem.


As with all sophisticated tax planning, the ideas outlined in this article require a good deal of care and experience in their implementation. A legal and tax ‘health check’ is an important prerequisite to any French tax and estate planning. For further advice and information, please contact Stephen Smith.

Stephen Smith (France) Ltd Tel: . Fax: 01473 436573.
0044 (0)1473 437186

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